Britain may be forced to suddenly hike taxes or impose austerity measures

Britain's economy is set to grow by 2.7% this year, the country
is heading towards full employment, and real wages have risen
by 7% over the last two years.

Everything looks pretty good for Britain's economy and it
suggests that the worse is behind us.

However, London-based think tank
Institute for Fiscal Studies warned that Britons could face
some surprise tax rate hikes or possibly even some more austerity
measures because Chancellor George Osborne may
feel “boxed in” by his own "ambitious
target to eliminate the budget deficit by 2019–20 and then to
continue to run budget surpluses thereafter."

The budget deficit is the amount in which
expenditures exceed revenue. A budget surplus is when income
exceeds expenditure.

The IFS published its
warning as part of its annual "Green Budget" document
which aims to analyse the issues and challenges
facing the country's Chancellor before the
government prepares to unveil his Budget in March every
year.

To meet his £10 billion surplus target by 2015, Osborne may
be forced to impose tax hikes or spending cuts. Osborne's
budget surplus target is the equivalent to 0.5% of
national income.

Osborne's promise to the nation is a difficult one to keep,
suggests the IFS (emphasis ours):

It could require big tax rises or spending cuts
with very little notice in order to ensure it is met.
Even if the Chancellor gets to the March 2019 Budget with his
plans intact, past errors in official forecasts suggest that
there would be more than a one-in-four chance that he would need
to implement in-year tax rises or spending cuts to deliver a
budget surplus in 2019–20.

Osborne is announcing his budget on March 16, and has
the tricky task of following through on his deficit-cutting
promise.

Britain's
Chancellor of the Exchequer, George Osborne, holds up his budget
case for the cameras as he stands outside number 11 Downing
Street, before delivering his budget to the House of Commons, in
London, Britain July 8, 2015.REUTERS/Paul
Hackett

The Conservative party were only re-elected last year and Prime
Minister David Cameron and Osborne promised to not to raise VAT,
national insurance or income tax.

The party also campaigned against extra taxes on things like
high-valued property, and cut corporation tax.

Altogether, that's a lot of revenue that now can't be raised.

The country also has problems in terms of spending. The
Conservatives have agreed not to cut health, education, or
foreign aid spending. And Cameron has insisted on reaching
NATO's aim for each country to spend an amount worth 2% of GDP on
defence.

The IFS pointed out that:

Between the November 2015 Autumn Statement and the end of January
2016, equity prices fell by 7½%. If they were to remain 7½% below
the OBR’s latest forecast, this could reduce capital tax receipts
in 2020–21 by around £2 billion.

So that means Britain has even less money coming in. Osborne is
stuck between a rock and a hard place. But looking at figures,
you would be forgiven in speculating that spending cuts may be
more likely — but you could be wrong.

The IFS warned that (emphasis ours):

The government might raise revenue through changes to the
pensions tax regime.

However, it will need to be careful to distinguish between what
is genuinely a permanent increase in revenues and what is only a
temporary windfall. Relying on temporary revenues to achieve a
budget surplus in 2019–20 would not be in keeping with the
rationale underpinning the Chancellor’s stated fiscal objectives.

But then again, Cameron's government promised
to "triple lock" for pensions, that means they rise at
the pace of wage growth or faster every year.

How Osborne proposes to get out of this dilemma will define
the budget next month.